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BlackRock faces US court battle over iShares lending revenue

by Daniel Grote on Feb 04, 2013 at 07:56

BlackRock faces US court battle over iShares lending revenue

Two US pension funds have filed a lawsuit against BlackRock alleging the asset manager has ‘looted’ securities lending revenues generated by a range of its iShares exchange traded funds (ETFs).

The suit states the pension funds are seeking to recover the portion of securities lending revenues that ‘were improperly spent by iShares’ management on grossly excessive compensation to securities lending agents affiliated with iShares,’ according to New Model Adviser® sister publication Wealth Manager.

The pension funds have alleged securities lending affiliate the BlackRock Institutional Trust Company (BITC) was able to take ‘at least 40%’ of the revenues, alleging the fee structure was ‘designed to loot securities lending returns properly due to iShares investors’.

Wealth Manager cited a source close to the situation as claiming the revenue split in the US is 65% to the investor and 35% to BlackRock. In Europe the split is 60% and 40%.

A spokesperson for BlackRock said: ‘Our securities lending program has delivered above average returns to our ETF shareholders over time. To achieve this, we run the program ourselves while bearing all the costs, rather than outsourcing to third parties as others do.

‘iShares has a long record of delivering the returns our ETF investors expect, and securities lending is one of the tools we use to help ensure our funds efficiently track the performance of their underlying indices.  The complaint is without merit, and we will contest it vigorously.’

In Europe, regulators are clamping down on the practice of securities lending, with new guidelines from the European Securities and Markets Authority requiring firms to return all revenues from securities lending, net of operational costs, to investors.

1 comment so far. Why not have your say?

Hickky

Feb 04, 2013 at 11:35

And there is the crux of the matter. Operational costs can be made to be whatever the manager wishes. ETFs have been promoted as a cheap way to gain long returns from a particulart market, but the managers have been lending stock to short term hedge funds to line their own pocket, in order for hedge fund operators to take a portion of the investers long profit. So how many of these ETFs that are not synthetic, practice this lending? Is the risk that this type of lending represents shown in the risk assessments that these funds disclose? If the borrower makes a loss on the borrowed stock and cannot repay the fund in shares, what is the position of the ETF?

I would urge the regulators of all western economies to limit the amount of stock that can be lent to these casino type operators, to no more than 1% of the fund at any one time. This should apply to pension funds, OEICs, ETFs ITs and any other funds aproved for retail sales.

Since the appearance of hedge funds in the market there has been a huge increase of volatility in the markets partially brought about by the voracious appitite for risky trades from this sector. They operate on borrowed money so if everything goes badly wrong the sufferers are the stock lenders, the banks that lent them the money and their shareholders. The operators can retreat to their Swiss or Monaco homes and try again, having made plenty themselves before going pear shaped.

If you limit the amount of stock available to borrow, the hedge operators will have to fight for the stock, and pay the lenders more compensation for the loan. Markets should be a little more stable, and long only investment would not be as volatile.

The hedge fund industry does little for the UK and other Western economies. So many of them have corporate structures encompassing many offshore juristrictions to ease tax burdens. The number of UK employees paying income tax is fairly small, but Hedgies have helped to boost the property prices in Belgravia, so no loss there then.

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